The equity options market has evolved into a vibrant and highly liquid marketplace, and it is contemplated that the turnover volume in the options marketplace has outpaced volume growth of the equity instruments underlying the options. Option volume growth, in percentage terms, is contemplated to be in excess of double the rate of growth for the securities underlying the options. For some individual equity issues, option volume represents as little as about two percent of the underlying volume to as much as about fifty percent of that volume, for example. In broad terms, it is contemplated that option volume represents about thirty to forty percent of the volume of the underlying market for securities with listed option series, and that there are about a thousand publicly traded equities with a listed options series attached to each.
While it is difficult to obtain attribution data pointing to the market segments responsible for such growth, it is contemplated that the growth is coming from two segments. The first is a more sophisticated segment of retail investors. They are likely users of on-line broker services such as TD Ameritrade or Scottrade or options specialists such as OptionsXpress. Such investors appear to be comfortable making their own execution decisions, and are contemplated as being likely to look to options as a way to hedge their holdings or, alternatively, generate additional investment income by engaging, for example, in buy-write strategies.
The second segment is the hedge fund community. The rise in options volume growth coincides with a growing market power of hedge funds. As assets under management (AUM) and the number of funds established have increased dramatically over the past five years so has options volume. Options are contemplated as being well-suited for hedge funds. Hedge funds provide leverage, both exposure as well as financial, and arbitrage opportunities and, with increasing volumes in the options markets, a means for establishing, increasing, decreasing or eliminating exposure to an instrument or sector but still minimize market impact at point of execution. In addition, with the onset of penny increment pricing with respect to options strike price increments, volume may grow at an even faster pace than recent history and pricing anomalies may be introduced. Some observations regarding the penny pilot program indicate that certain issues increased in excess of thirty-five percent in trading volume. Further, because each market-maker sets prices, pricing discrepancies have been observed between the same options series traded on different exchanges.
The discrepancy in price on different exchanges, as well as the fast pace of trading that can cause price to change over a short time, are both exemplary results of market forces that can impact upon the ultimate purchase price of an option. This presents problems to a party placing an order for an options transaction at a desired price or implied volatility, because there is typically no guarantee that the price or volatility of the option when the order was placed will be substantially the same as the price or volatility at the time (and place) when the order is executed or identified as being executable. Compounding this problem is that an executor cannot initiate such a transaction absent knowledge that such transaction is authorized by the originator.
What is needed in the art is a system and method for managing an order between an originator and an executor, such that the executability of the order in view of changed circumstances is effectively managed.